23 Feb 2015

How should a country manage its natural resources?

No matter the country's state of development -- poor or rich -- it is important to:

Manage the resource to maximize its value, and

Distribute the surplus from the resource to all citizens.

Failure to do either of these means "wasting the national patrimony."

On (1), for example, the government of Brazil requires that Petrobras (its national oil company) use domestic suppliers (instead of the lowest or most qualified bidder) and that it sell fuel below cost (thereby requiring Petrobras to import fuel to sell at a loss).

On (2), for example, the government of Saudi Arabia diverts most profits from oil into the hands of the royal family, rather than a sovereign wealth fund or to citizens. This concentration of wealth drives massive inequality and dislike of the government -- two factors that may explain Saudi citizens participation in 9/11.

I could give many examples of how violating (1) and/or (2) has resulted in resource depletion, corruption, poverty, and so on.

Bottom Line: The only way to avoid the "resource curse" is to manage the resource to its full value and share that value among ALL its owners.

When you spoke about ALL owners, I think you need to state very explicitly that it's not just all the owners currently around, but to address inter-generational equity as well. As a Baby Boomer who has enjoyed immense wealth from my generation's exploitation of resources I think we need to take a hard look at what we leave future generations.

If my great grand-children could come back from the future and bid today for the gas reserves we are profligately guzzling, I bet they would outbid every one of today's users, then we'd know the worth of our natural resources.

@SS -- yes indeed!@NM -- I agree, but I'll add that "correct pricing" would accomplish this goal. In the case of water and other renewable resources (fish trees etc), correct pricing would maintain stocks. In the case of non-renewable resources, correct pricing would deplete stocks at a reasonable rate, i.e., such that technological adaptation (anything from high efficiency appliances to solar) was able to substitute for scarcity over time...

We disagree on correct pricing. Because there is no way for my great grand-children to transact to impose onto me the costs of the externality that my profligacy imposes onto them, there is no way that current pricing can be “correct” and produce the best economic/welfare outcomes across generations.

The only thing that can do it is my moral standard that says I should think about the welfare of future generations in deciding on my actions.

@NM -- But how is your opinion on pricing any better than my shot at "correct" -- esp. when many other people have opinions? The definition of "sustainable" -- IMO -- is the best shot at taking future generations into account, as it targets the ongoing (and indefinite) use/existence of the resources.

Correct pricing works for sustainable/renewable resources because they usually have a life cycle that is short enough for correct pricing to benefit me by maintaining a supply through my lifetime. So my overconsumption is visited on me, as well as future generations. So I think we’re on the same page for that sort of resource pricing.

In my opinion, it doesn’t work for non-renewable resources, so, to go back to my original proposition, I’m happy for your proposal, as long as you explicitly include future generations in the list of people who you classify as ALL the Owners.

Yes, we're basically in agreement. The trouble is not "including future generations" but finding a price that THIS generation agrees on. We saw with the Stern Report that there are two camps: low discount rate b/c they need our help (irreversible damages) and a higher one b/c they do not (tech change). I fall in the former camp (as do you), but the latter camp cannot be called selfish given past technological developments. That doesn't remove the massive risk that they are taking with their "bet on progress" -- see Julian Simon, et al. http://www.env-econ.net/2008/05/was-julian-simo.html